Excise duty cut, R&D sops high on drug cos’ wish-list

Gireesh Chandra Prasad, TNNFeb 13, 2007, 03.37am IST

MUMBAI: Indian drug makers lament they won't have a future in a knowledge economy when they make profits of less than a tenth of what, their counterparts in the West say, is needed to invent a new drug. According to them, the situation is set to become more serious by the end of March 2007, when they would no longer be able to enjoy a crucial incentive for research. Pharmaceutical companies desperately hope for a 10-year extension of a scheme that allows deducting one-and-a-half times the cost of research while calculating the taxable income.

The scheme allowing 150% weighted deduction of R&D expenditure is set to expire by the end of 2006-07 fiscal. The chemicals and fertilisers ministry has made a strong case for extending it till 2017 as well as to raise it to 200% in the coming budget. It has favoured enlarging its scope to include investments on land to set up research facilities, clinical trials and filing of regulatory dossiers abroad. Drug makers also expect an extension of the 2007 deadline to 2012 to get government approval for research projects that enjoy a similar 100% deduction in profits.

Pharmaceutical companies say they are also hit by last year's clarification by the finance minister that testing experimental drugs on human beings would attract 12% service tax and the education cess.

Till last year, there was no clarity on whether 'technical and analytical services' include clinical testing of drugs and formulations too. Many of the industry demands, including this, have support from the parent ministry. In an industry where promotional expenses are quite high, the fringe benefit tax is a disincentive to provide doctors' samples — a bait for attracting new customers. FBT also covers travelling expenses.

According to Organisation of Pharmaceuticals Producers of India (OPPI), the industry body for foreign drug makers, it is not the government's intention to tax non-employees and genuine business expenses and, hence, the provision needs to be changed. The concessional 5% FBT should be made applicable to clinical trials, research and trading companies, they say. Besides, physicians' samples should be exempted from the 16% customs duty as they are not meant to be sold, companies argue.

Consumers may expect some reduction in the prices of costly imported drugs as the government may continue the trend of reducing customs duty. Many drugs already enjoy a zero or 5% concessional customs duty while others attract a 12.5% basic customs duty.

Companies have asked the government to exempt 143 imported drugs from the 4% special additional customs duty also to make them less expensive. The chemicals ministry had recommended total customs and excise duty exemption for all cancer and HIV drugs, irrespective of whether they figure in the national essential drug list or not. Also, an excise duty cut from 16% to 8% on all drugs is widely expected.

The finance ministry had recently made the excise duty applicable on a smaller portion of the maximum retail price. Now it is applicable on 57.5% of the printed MRP. The industry wants it to be applicable on 48% of the MRP, which appears unlikely.